[Federal Register Volume 69, Number 235 (Wednesday, December 8, 2004)]
[Proposed Rules]
[Pages 70925-70936]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-26935]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 69, No. 235 / Wednesday, December 8, 2004 / 
Proposed Rules  

[[Page 70925]]



FEDERAL RESERVE SYSTEM

12 CFR Part 226

[Regulation Z; Docket No. R-1217]


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Advance notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The Board is publishing for public comment an advance notice 
of proposed rulemaking (ANPR) to commence a review of the open-end 
(revolving) credit rules of the Board's Regulation Z, which implements 
the Truth in Lending Act. The Board periodically reviews each of its 
regulations to update them, if necessary. The ANPR seeks comment on a 
variety of specific issues relating to three broad categories: the 
format of open-end credit disclosures, the content of the disclosures, 
and the substantive protections provided under the regulation. The ANPR 
solicits comments on the scope of the review, and also requests 
commenters to identify other issues that the Board should consider 
addressing in the review.

DATES: Comments must be received on or before March 28, 2005.

ADDRESSES: You may submit comments, identified by Docket No. R-1217, by 
any of the following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include the 
docket number in the subject line of the message.
     FAX: (202) 452-3819 or (202) 452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    See Supplementary Information, Section I., for further instructions 
on submitting comments.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, except as necessary for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper in Room MP-500 of the Board's Martin Building (20th and C 
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Elizabeth A. Eurgubian, Attorney, Dan 
S. Sokolov and Krista P. DeLargy, Senior Attorneys, Daniel G. Lonergan 
and John C. Wood, Counsel, or Jane E. Ahrens, Senior Counsel, Division 
of Consumer and Community Affairs, Board of Governors of the Federal 
Reserve System, at (202) 452-3667 or 452-2412; for users of 
Telecommunications Device for the Deaf (``TDD'') only, contact (202) 
263-4869.

SUPPLEMENTARY INFORMATION:

I. Form of Comment Letters

    This ANPR requests data or comment on specific issues relating to 
Regulation Z's open-end credit rules. These requests are numbered 
consecutively. Commenters are requested to refer to these numbers in 
their submitted comments, which will assist the Board and members of 
the public that review comments online. Questions are presented by 
subject matter as follows:
    Scope of the review: Q1.
    Format of Disclosures:
    Account-opening disclosures, Q2-Q3.
    Periodic statements, Q4-Q6.
    Credit card application disclosures (the ``Schumer box''), Q7-Q8.
    Subsequent disclosures, Q9.
    Model forms and clauses, Q10-Q12.
    Content of Disclosures:
    Classifying and labeling fees as ``finance charges'' and ``other 
charges,'' Q13-Q20.
    Over-the-credit-limit fees, Q21-Q22.
    ``Effective'' or ``historical'' annual percentage rate on periodic 
statements, Q23-Q25.
    Disclosures about rate changes, Q26-Q27.
    Balance calculation methods, Q28-Q30.
    Minimum payments, Q31-Q33.
    Payment allocation, Q34-Q36.
    Tolerances, Q37.
    Other questions, Q38-Q42.
    Substantive protections:
    General, Q43.
    Accessing credit card accounts, Q44.
    ``Convenience checks,'' Q45.
    Unsolicited issuance of credit cards, Q46.
    Prompt crediting of payments, Q47-Q51.
    Additional Issues:
    Providing guidance not expressly addressed in existing rules, Q52.
    Adjusting exceptions based on de minimis amounts, Q53.
    Improving plain language and organization; identifying technical 
revisions, Q54.
    Deleting obsolete rules or guidance, Q55.
    Recommendations for legislative changes, Q56.
    Recommendations for nonregulatory approaches, Q57.
    Reviewing other aspects of Regulation Z, Q58
    The Board also requests that when possible, comment letters should 
use a standard typeface with a font size of 10 or 12. This enables the 
Board to convert text submitted in paper form to machine-readable form 
through electronic scanning, and eases automated retrieval of comments 
for review.

II. Background

    The Congress based the Truth in Lending Act (TILA) on findings that 
economic stability would be enhanced and competition among consumer 
credit providers would be strengthened by the informed use of credit, 
which results from consumers' awareness of the credit's cost. The 
purposes of the TILA are: (1) To provide a meaningful disclosure of 
credit terms to enable consumers to compare the various credit terms 
available in the marketplace more readily and avoid the uninformed use 
of credit; and (2) to protect consumers against inaccurate and unfair 
credit billing and credit card practices. 15 U.S.C. 1601(a).
    TILA's disclosures differ somewhat depending on whether consumer 
credit is an open-end (revolving) plan or a closed-end (installment) 
loan. TILA also contains procedural and substantive protections for 
consumers, for both open-end and closed-end transactions.

[[Page 70926]]

    TILA is implemented by the Board's Regulation Z. 12 CFR part 226; 
15 U.S.C. 1604(a). An Official Staff Commentary interprets the 
requirements of Regulation Z. 12 CFR part 226 (Supp I). Creditors that 
follow in good faith Board or official staff interpretations are 
insulated from civil liability, criminal penalties, or administrative 
sanction. 15 U.S.C. 1640(f).

III. Reviewing the Open-End Credit Rules

    TILA, enacted in 1968, was substantially revised by the Truth in 
Lending Simplification Act of 1980. Regulation Z was revised and 
reorganized to implement the new law, effective in 1982 (46 FR 20892, 
April 7, 1981). Since then, the regulation has not been reviewed in its 
entirety, although much of it has been reviewed in individual 
rulemakings, to implement new legislation, in response to congressional 
requests for reports, or pursuant to public hearings.\1\ The Official 
Staff Commentary is typically updated annually.
---------------------------------------------------------------------------

    \1\ Amendments to Regulation Z have addressed adjustable-rate 
mortgage loans (52 FR 48665, December 24, 1987); home equity lines 
of credit (54 FR 24670, June 9, 1989), credit and charge card 
applications and solicitations (54 FR 13855, April 6, 1989 and 65 FR 
58903, October 3, 2000), and potentially abusive mortgage lending 
practices (high-cost loans and reverse mortgages, 60 FR 15463, March 
24, 1995, and 66 FR 65604, December 20, 2001). In connection with 
reports to the Congress, the Board reviewed the rules relating to 
consumers' right to rescind certain mortgage transactions (1995); 
finance charges (1996); home-equity lines of credit (1996); and 
closed-end mortgage loans (1998).
---------------------------------------------------------------------------

    Scope of the Review. The Board periodically reviews it regulations 
to update them. The Board plans to review Regulation Z over the next 
few years. The regulation is sufficiently lengthy and complex, however, 
that conducting the review in stages appears to be the most appropriate 
approach. The Board is proposing to focus the first stage of the review 
on Regulation Z's rules for open-end (revolving) credit accounts that 
are not home-secured, chiefly general-purpose credit cards and 
merchant-specific credit plans, although the rules apply to open-end 
lines generally. Other aspects of the regulation would also be 
addressed if the Board determines that it is necessary or appropriate 
to do so. Accordingly, comment is also requested on other ways that 
Regulation Z could be improved in Section VI, below. Plans for future 
stages of the review of Regulation Z are discussed in Section VII, 
below. Some provisions in Regulation Z apply to both open- and closed-
end credit. Even though the Board is proposing to review Regulation Z 
in stages, the Board will consider the need for consistency across the 
regulation in proposing revisions.
    Q1. The Board solicits comments on the feasibility and advisability 
of reviewing Regulation Z in stages, beginning with the rules for open-
end credit not home-secured. Are some issues raised by the open-end 
credit rules so intertwined with other TILA rules that other approaches 
should be considered? If so, what are those issues, and what other 
approach might the Board take to address them?
    Goals. In reviewing Regulation Z, the Board's primary goal is to 
improve, if possible, the effectiveness and usefulness of open-end 
disclosures and substantive protections. Consumers' use of open-end 
credit, especially lines accessed by credit cards, has grown markedly. 
The ways in which consumers can access open-end lines and the uses they 
can make of these lines have both expanded. Pricing has become more 
complex and products increasingly diverse, especially for general 
purpose credit cards. Taken together, these factors suggest it is 
appropriate to consider whether the open-end disclosure rules and 
substantive protections of Regulation Z are achieving their intended 
purposes, which are to permit consumers to make informed decisions 
about the use of credit and to protect consumers against inaccurate and 
unfair credit billing and credit card practices. The review will also 
consider ways to address concerns about information overload, which can 
adversely affect how meaningful the disclosures are to consumers. 
Disclosures required under TILA are required to be clear and 
conspicuous; the Board intends to study alternatives for improving the 
format of disclosures, including revising the model forms and clauses 
published by the Board, to ensure that consumers get timely information 
in a readable form.
    TILA also seeks to establish uniformity in creditors' disclosures 
to promote comparison shopping. Thus, in conducting the review, the 
Board will consider ways that the rules can be clarified for creditors 
to facilitate compliance and promote consistency in their disclosures. 
Pursuant to the Board's mandate under the Economic Growth and 
Regulatory Paperwork Reduction Act, the Board also intends to consider 
ways to reduce unnecessary regulatory burden consistent with the 
purposes and requirements of TILA. (See 68 FR 35589, June 16, 2003; 69 
FR 2852, January 21, 2004; 69 FR 43347, July 16, 2004.)
    Following the ANPR, the Board may determine that proposed revisions 
to Regulation Z's open-end credit rules are appropriate, but there may 
be other responses to the issues raised. For example, the Board may 
consider whether to recommend legislative changes. The Board may 
conclude that a non-regulatory response would be the most effective 
approach in addressing some issues, for example the issuance of 
recommended best practices or consumer education efforts. These 
alternative approaches are discussed in Section VI, below.
    The Board's Authority under TILA. TILA mandates that the Board 
prescribe regulations to carry out the purposes of the act. 15 U.S.C. 
1604(a). In promulgating open-end credit rules to implement TILA, the 
Board is also authorized, among other things, to do the following:
     Issue regulations that contain such classifications, 
differentiations, or other provisions, or provide for such adjustments 
and exceptions for any class of transactions, that in the Board's 
judgment are necessary or proper to effectuate the purposes of TILA, 
facilitate compliance with the act, or prevent circumvention or 
evasion. 15 U.S.C. 1604(a).
     Exempt from all or part of TILA any class of transactions 
if the Board determines that TILA coverage does not provide a 
meaningful benefit to consumers in the form of useful information or 
protection. The Board must consider factors identified in the act and 
publish its rationale at the time a proposed exemption is published for 
comment. 15 U.S.C. 1604(f).
     Exempt from TILA certain transactions involving consumers 
who first provide a written waiver of their TILA protections and whose 
annual earned income or net assets at the time of the transaction 
exceeds a certain dollar figure ($200,000 and $1,000,000, 
respectively), which the Board may adjust for inflation. 15 U.S.C. 
1604(g).
     Provide tolerances for numerical disclosures other than 
the annual percentage rate (APR), so long as the tolerances are narrow 
enough to prevent disclosures that are misleading or that circumvent 
TILA's purposes. 15 U.S.C. 1631(d).
    Open-end Consumer Credit in Today's Marketplace. The principal 
examples of open-end credit not home-secured are general-purpose credit 
cards and merchant-specific credit plans, which may or may not involve 
cards. In determining how the Board's goals for the Regulation Z review 
can best be met, the Board will consider the nature and function of 
open-end credit accounts, and how the market for open-end credit

[[Page 70927]]

has developed since the last major review of the open-end rules.
    Recent studies and consumer surveys (including a 2001 survey of 
consumers with general purpose credit cards discussed in the April 2002 
article noted below) provide some data on open-end credit plans and how 
consumers use them, particularly credit card accounts, as follows:\2\
---------------------------------------------------------------------------

    \2\ Thomas A. Durkin, Credit Cards: Use and Consumer Attitudes, 
1970-2000, Federal Reserve Bulletin, (September 2000); Thomas A. 
Durkin, Consumers and Credit Disclosures: Credit Cards and Credit 
Insurance, Federal Reserve Bulletin (April 2002).
---------------------------------------------------------------------------

     Increased number of cards held. In 2001, 73 percent of 
households had at least one general purpose credit card with a 
revolving feature, compared to 43 percent in 1983. The 2001 consumer 
survey noted above showed that 20 percent of the respondents obtained a 
new general purpose credit card within the previous year, and that 
around 84 percent of those respondents did so as a result of a 
solicitation. The survey also showed that nearly two-thirds of the 
respondents who had acquired a new card in the previous year already 
held two other credit card accounts, and over one-third of respondents 
with general purpose credit cards with a revolving feature held three 
or more.
     Wide range of uses. Open-end plans, credit cards in 
particular, are widely used in today's marketplace. Credit cards serve 
as a substitute for cash and checks for millions of routine purchases, 
and allow consumers to engage in transactions such as telephone and 
Internet purchases. Also, credit limits can be high, and consumers now 
commonly finance the purchase of ``big-ticket'' items (such as 
appliances and furniture) under an open-end plan rather than a closed-
end installment loan, as they did in the past. Card issuers have also 
developed other access methods for consumers to use their accounts, 
such as by offering ``convenience checks'' that may be used for 
purchases or to transfer balances from other accounts. In the 2001 
survey noted above, about 20 percent of respondents having general 
purpose credit cards with a revolving feature had transferred balances 
in the previous year.
     More complex pricing. General purpose credit-card pricing 
has become more complex. A single account may have multiple APRs for 
different types of credit extensions, or that apply for limited time 
periods. Credit cards are available to consumers with a much wider 
range of credit risks, due to improved technology for risk-evaluation. 
As a result, pricing is more varied. Also, competition has reduced 
``front-end'' costs for general purpose credit cards as card issuers 
eliminate annual fees and offer substantial discounts in initial 
interest rates. On the other hand, ``back-end'' costs have increased 
through higher late fees, over-the-credit-limit fees, and the use of 
penalty rates for late payers. In the surveys noted above, about 30 
percent of credit card users reported paying a late fee within the 
previous year.
     Additional account features. The 2001 survey noted above 
showed that in making choices about opening or replacing card accounts, 
consumers consider a variety of factors, ranging from cost information 
about rates, annual fees, and minimum payments, to benefits such as 
rebate and reward programs.
     Consumers' perceptions about account information. The 2001 
survey of consumers with general purpose credit cards asked the 
respondents about their perceptions of information available for these 
accounts. Sixty-five percent said that useful information on credit 
terms was either ``very easy'' or ``somewhat easy'' to obtain, and only 
6 percent thought it very difficult. But when asked questions about 
consumers' understanding and use of Truth in Lending disclosures at 
account opening or on monthly bills for general purpose credit cards, 
nearly one-third of the respondents suggested improvements could be 
made regarding format and clarity.

IV. Summary of TILA's Rules for Open-End Credit Accounts

    Under TILA, as implemented by Regulation Z, open-end credit exists 
when consumer credit is extended under a plan in which (1) the creditor 
reasonably contemplates repeated transactions, (2) the creditor may 
impose a finance charge from time to time on an outstanding unpaid 
balance, and (3) the credit is replenished as it is used, up to any 
limit set by the creditor. 15 U.S.C. 1602(i); 12 CFR 226.2(a)(20). The 
rules that apply to open-end credit also apply to creditors that issue 
``charge cards'' that typically require outstanding balances to be paid 
in full at the end of each billing cycle. 12 CFR 226.2(a)(17)(iii). For 
purposes of this ANPR, the terms ``open-end credit'' and ``credit 
card'' encompass ``charge card.''
    Disclosures. TILA and Regulation Z require creditors offering open-
end credit plans to disclose costs and other terms related to the plan. 
To summarize:
     Disclosures must be provided with credit card applications 
and solicitations. Consumers receive key cost information in an 
abbreviated manner, to help consumers decide whether to apply for the 
card account. For direct mail solicitations, the disclosures are 
presented in a highly structured table.
     Disclosures provided at account-opening describe how 
charges associated with the plan will be determined. Consumers receive 
information about the periodic rate, disclosed as an APR, that will be 
applied to the outstanding balance, along with other fees that may be 
assessed on the account. Consumers' rights and responsibilities in the 
case of unauthorized use or billing disputes are also explained. 
Consumers must receive these disclosures before the first transaction 
on the account.
     Disclosures on periodic statements reflect the activity on 
the account for the statement period. In addition to the APR based on 
the periodic rate, periodic statements must also disclose the effective 
or ``historical'' APR for the billing cycle. The effective APR includes 
finance charges imposed in addition to interest (such as cash advance 
fees or balance transfer fees). Transactions that occurred and any fees 
imposed during the cycle must be identified on the statement, along 
with any time period a consumer may have to pay an outstanding balance 
and avoid additional finance charges (the ``grace period'').
     Disclosures about changes in account terms and about the 
terms for using a new credit feature or means of access are provided on 
an ad hoc basis.
    Substantive and procedural protections. TILA and Regulation Z also 
provide procedural and substantive protections to consumers with open-
end accounts, including special protections for credit cardholders, 
summarized below:
     Consumers using an open-end credit plan may assert a 
billing error, which triggers creditors' duty to investigate the 
allegation within prescribed time limits.
     Cardholders may assert against a card issuer claims or 
defenses arising from a credit card purchase, if the merchant honoring 
the card fails to resolve any dispute about the quality of the goods or 
services.
     Cardholders' liability for the unauthorized use of a 
credit card is capped at $50.
     Credit cards may be issued to consumers only upon request. 
One or more credit cards may be issued to cardholders in renewal of, or 
substitution for, an accepted card, with some conditions.
     Consumers' payments on the account must be credited as of 
the date

[[Page 70928]]

the creditor receives the payment and creditors must refund credit 
balances.
     Creditors cannot offset consumers' credit card debt with 
funds held on deposit with the card issuer except in specified 
circumstances.

V. Request for Information and Comments on TILA's Disclosures and 
Protections

    Under open-end plans, consumers generally control how the plan is 
accessed and the amount and timing of credit extensions and payments. 
Because consumers' decisions about using their open-end credit accounts 
are continuous, the relevance of key account terms to consumers' use of 
the account varies over the life of the account. Thus, the 
effectiveness of disclosures must be considered in light of the 
multiple functions they serve.
    For example, some information received at account-opening may 
become relevant years later, for example, when a consumer who uses a 
credit card account for purchases decides for the first time to obtain 
a cash advance. Information provided on periodic statements tells 
consumers about account activity for the statement period, but it also 
allows consumers to make ongoing credit decisions about how much credit 
to use and how much of the outstanding balances to pay on various 
accounts. And consumers may use existing account-opening or periodic 
statement disclosures to compare offers they receive to apply for 
another account or transfer existing balances to another account.

A. Would Format Changes Enhance Consumers' Ability To Notice and 
Understand Disclosures by Making Them More Clear and Conspicuous?

    Open-end disclosures are subject to few formatting rules. Creditors 
have great flexibility in designing account-opening, periodic 
statement, and other open-end disclosures. The primary exception to 
TILA and Regulation Z's flexible formatting rules for open-end credit 
is the abbreviated and segregated tabular disclosures required for 
credit card solicitations and applications (known as the ``Schumer 
box''). 15 U.S.C. 1637(c); 12 CFR 226.5a(a)(2). TILA disclosures must 
be ``clear and conspicuous,'' which is generally interpreted to be in a 
``reasonably understandable form.'' 15 U.S.C. 1632; 12 CFR 226.5(a)(1); 
comment 5(a)(1)-1.\3\
---------------------------------------------------------------------------

    \3\ For purposes of credit card application and solicitation 
disclosures, the ``clear and conspicuous'' standard is interpreted 
to mean that the disclosures must also be ``readily noticeable to 
the consumer.'' See Comment 5a(a)(2)-1.
---------------------------------------------------------------------------

    In June 2004, the Board withdrew regulatory proposals that would 
have established a uniform standard for ``clear and conspicuous'' 
disclosures under Regulations B, E, M, Z, and DD. 69 FR 35541, June 25, 
2004. Instead of adopting general definitions or standards that would 
apply across the five regulations, the Board decided to focus on 
individual disclosures and to consider ways to make specific 
improvements to the effectiveness of each disclosure. The Board noted 
that the effort to review individual disclosures would be undertaken in 
connection with the Board's periodic review of its regulations, 
commencing with the issuance of an ANPR to review the rules for open-
end credit accounts under TILA and Regulation Z. Although the proposals 
defining ``clear and conspicuous'' were withdrawn, they reflected 
principles that will guide the Board in reviewing individual 
disclosures and revising the regulation and the Board's model forms and 
clauses.
    In the questions that follow, the Board seeks comment on ways to 
make the disclosures for open-end credit accounts more understandable 
and noticeable. Commenters are specifically requested to identify any 
particular concerns relating to the format of electronic disclosures.
    Account-opening disclosures. TILA's account-opening disclosures are 
provided to consumers before the plan is opened (or before the first 
transaction). 15 U.S.C. 1637(a); 12 CFR 226.5(b)(1). Creditors 
typically provide the TILA disclosures in an account agreement that 
also contains contract terms and state-law disclosures. The agreement 
is typically a lengthy document in a small type size.
    A primary purpose of the account-opening disclosures is to allow 
consumers to have key information about the account before they use the 
plan at all. Because consumers' use of the plan may change over time, 
however, these disclosures remain important over the life of the plan. 
Consumers may also refer to their account-opening disclosures when 
comparing the terms of their existing account to offers subsequently 
received from other card issuers. As stated above, data from a 2001 
survey indicate that a significant number of consumers respond to 
solicitations for new credit card accounts.
    Data from the 2001 survey of consumers with general purpose credit 
cards reveals that about two thirds of the respondents said that useful 
information on credit terms was either ``very easy'' or ``somewhat 
easy'' to obtain.\4\ However, about three-fourths of consumers also 
agree (strongly or somewhat) with the statement that TILA statements 
``are complicated.'' Nearly one-third suggested improvements could be 
made to the format and clarity of Truth in Lending disclosures at 
account opening or on monthly bills for general purpose credit cards, 
such as by providing information that is ``clearer, simpler, easier to 
understand, written in lay terms, or in larger print.''
---------------------------------------------------------------------------

    \4\ Thomas A. Durkin, Consumers and Credit Disclosures: Credit 
Cards and Credit Insurance, Federal Reserve Bulletin (April 2002), 
p. 207.
---------------------------------------------------------------------------

    The Board has received comments about the format of account-opening 
disclosures in connection with recent rulemakings. The views of the 
members of the Board's Consumer Advisory Council (CAC) have also been 
solicited. Many who commented believe that much of the information 
considered to be important is already contained in the disclosures; 
because a lot of information is provided at account opening, however, 
there is the potential for information overload, which can impair the 
disclosures' effectiveness. Accordingly, in connection with the review 
of Regulation Z, the Board proposes to consider ways to ease consumers' 
ability to navigate through the disclosures.
    Several format changes have been suggested that might assist in 
this regard. Some members of the CAC believe that disclosures would be 
improved by including a page-one ``executive summary'' paragraph or a 
disclosure table to highlight key features and terms of the account, 
similar to the Schumer box disclosure provided with credit card 
solicitations. Such an executive summary need not be limited to 
information included in the Schumer box, but could incorporate other 
information, such as abbreviated description of items that, based on 
consumer surveys, are considered to be most important to consumers 
(e.g., an annual fee, potential rate changes, amount of credit line, 
minimum monthly payment, special account benefits). Either as a part of 
this notion, or as a stand-alone change, consumers might benefit from a 
directory or ``table of contents'' box that would highlight for readers 
where specific terms might be found, to assist consumers in navigating 
through the document (for example, ``Late fees * * * see paragraphs 12, 
14''). This concept addresses the anecdotal evidence that consumers 
often choose not to read the entire disclosure at once, but seek out 
information on specific terms from time

[[Page 70929]]

to time, at the outset of the account relationship and subsequently.
    Q2. What formatting rules would enhance consumers' ability to 
notice and understand account-opening disclosures? Are rules needed to 
segregate certain key disclosures from contractual terms or other 
information so the disclosures are more clear and conspicuous? Should 
the rules require that certain disclosures be grouped together or 
appear on the same page? Are minimum type-size requirements needed, and 
if so, what should the requirements be?
    Q3. Are there ways to use formatting tools or other navigational 
aids for TILA's account-opening disclosures that will make the 
disclosures more effective for consumers throughout the life of the 
account? If so, provide suggestions.
    Periodic statements. TILA and Regulation Z contain few formatting 
rules for disclosures provided on periodic statements. Periodic 
statement disclosures provide information about account activity during 
the statement period; but consumers might also use information on the 
statements to make decisions about payments and the future use of their 
account, which affects the overall cost of credit. The Board solicits 
comment on the general need for format requirements for periodic 
statements, including the following:
    Q4. Format rules could require certain disclosures to be grouped 
together or appear on the same page where it would aid consumer's 
understanding. For example, some card issuers disclose a 25-day grace 
period on the back of the periodic statement that can be used to 
calculate the payment due date; the same card issuer might also show a 
``please pay by date'' on the front of the periodic statement that is 
based on a 20-day period. Some consumers might assume the 20-day period 
reflects the due date; other consumers may ascertain the actual due 
date by looking on the back of the statement. Potential consumer 
confusion might be reduced by requiring creditors to disclose the grace 
period or the actual due date on the first page of the statement, 
adjacent to the ``please pay by'' date. Is such a rule desirable? Are 
there other disclosures that should be grouped together on the same 
page?
    Q5. Could the cost of credit be more effectively presented on 
periodic statements if less emphasis were placed on how fees are 
labeled, and all fees were grouped together on the periodic statement? 
Are there other approaches the Board should consider? If so, provide 
suggestions.
    Q6. How could the use of formatting tools or other navigational 
aids make the disclosures on periodic statements more effective for 
consumers?
    Credit card application disclosures (the ``Schumer box''). The 
disclosures required for credit card solicitations and applications 
have the most regimented format requirements. TILA disclosures must be 
presented in a table (known as the ``Schumer box'') with headings 
substantially similar to those published in the Board's model forms. 
(Format requirements for ``take-one'' applications are quite flexible; 
card issuers have the option to use the format required for direct-mail 
applications.)
    In 2000, the Board revised the format requirements for these 
tabular disclosures. 65 FR 58903, October 3, 2000. The regulation's 
sole type-size requirement applies to direct-mail application 
disclosures; the APR for purchases must be in at least 18-point type 
size. 12 CFR 226.5a(b)(1). Also, the ``clear and conspicuous'' standard 
is interpreted to mean that application disclosures must be ``in a 
reasonably understandable form and readily noticeable to the 
consumer.'' Disclosures that are printed in a 12-point type size have a 
safe harbor in the regulation under this standard. Comment 5a(a)(2)-1.
    Q7. Is the ``Schumer box'' effective as currently designed? Are 
there format issues the Board should consider? If so, provide 
suggestions.
    Q8. Balance transfer fees and cash advance fees may be disclosed 
inside the ``Schumer box'' or clearly and conspicuously elsewhere on or 
with the application. 12 CFR 226.5a(a)(2)(i). Given the prevalence of 
balance transfer promotions in credit card applications and 
solicitations, should balance transfer fees be included in the Schumer 
box?
    Subsequent disclosures. Creditors have great flexibility under TILA 
and Regulation Z in disclosing changes in account terms and the terms 
for new credit features or access devices offered after the account is 
opened.
    Q9. Are there formatting tools or navigational aids that could more 
effectively link information in the account-opening disclosures with 
the information provided in subsequent disclosures, such as those 
accompanying convenience checks and balance transfer checks? If so, 
provide suggestions.
    Model forms and clauses. The Board publishes model forms and model 
clauses to ease compliance. Creditors are not required to use these 
forms or clauses, but creditors that use them properly are deemed to be 
in compliance with the regulation regarding those disclosures. See 15 
U.S.C. 1604(b). The Board has few model clauses and forms for account-
opening or periodic statement disclosures.
    Q10. Should existing clauses and forms be revised to improve their 
effectiveness? If so, provide specific suggestions.
    Q11. Would additional model clauses or forms be helpful? If so, 
please identify the types of new model clauses and forms that the Board 
should consider developing.
    Q12. In developing any proposed revisions or additions to the model 
forms or clauses, the Board plans to utilize consumer focus groups and 
other research. The Board is aware of studies suggesting that, for 
example, bolded headings that convey a message are helpful, but using 
all capital letters is not.\5\ Is there additional information on the 
navigability and readability of different formats, and on ways in which 
formatting can improve the effectiveness of disclosures?
---------------------------------------------------------------------------

    \5\ Colin Wheildon, Type & Layout; How Typography and Design Can 
Get Your Message Across--or Get in the Way,'' Berkley: Strathmoor 
Press; Revised edition (March 1, 1995).
---------------------------------------------------------------------------

B. How Can the Content of Disclosures Be Improved or Simplified To 
Enhance Consumers' Understanding of the Cost of Credit?

    TILA is designed to provide consumers with information about costs 
and terms to enable them to make comparisons among creditors and 
different credit programs, or determine whether they should use the 
credit line at all. In the questions that follow, the Board solicits 
comment generally on how the content of disclosures can be improved to 
enhance consumers' understanding about costs and terms. In addition, 
comment is specifically requested on how disclosures can be simplified 
while ensuring that consumers have the information they need to make 
informed decisions about the use of their credit accounts.
Can the Rules for Classifying and Labeling Fees as ``Finance charges'' 
and ``Other Charges'' Be Improved?
    How a particular fee is classified affects when and how the fee is 
disclosed under TILA. Creditors offering open-end credit must disclose 
fees that are ``finance charges'' as well as ``other charges'' that are 
part of the credit plan.
    A ``finance charge'' is broadly defined as any charge payable 
directly or indirectly by the consumer and imposed directly or 
indirectly by the creditor, as an incident to or a condition of the 
extension of credit. 15 U.S.C. 1605; 12 CFR 226.4. Interest, cash 
advance fees,

[[Page 70930]]

and balance transfer fees are examples of finance charges. Finance 
charges must be disclosed in the account-opening statement. If imposed 
in a particular billing cycle, finance charges must be disclosed on the 
periodic statement, where the fee must be labeled as a ``finance 
charge.'' If a finance charge fee increases, a change-in-terms notice 
is generally required. If imposed in a particular billing cycle, a 
finance charge must also be included in the effective (or 
``historical'') APR, which expresses the total finance charge, not just 
interest, as an annual rate. 15 U.S.C. 1606(a)(2). Non-recurring loan 
fees, points, or similar finance charges related to the opening, 
renewing, or continuing of an open-end account are excluded from the 
effective APR. 12 CFR 226.14(c)(3), footnote 33, comment 14(c)-7.
    If the fee is not a finance charge, but is significant and imposed 
as part of the plan, it is an ``other charge'' and must be disclosed at 
account-opening; on each applicable statement, though not with any 
particular label; and, for some but not all ``other charges,'' on a 
change-in-terms notice when the amount of the fee increases. 15 U.S.C. 
1637(a)(5), 12 CFR 226.6(b), 7(h); comment 6(b)-1. Examples of ``other 
charges'' are penalty fees for late payment or exceeding a credit 
limit, and periodic membership or participation fees that are payable 
whether or not the consumer actually uses the credit plan.
    If the fee is neither a finance charge nor an ``other charge'' (for 
example, returned check fees), TILA does not require that it be 
disclosed initially. If such a fee is charged to the consumer and 
billed to the account, the fee must be disclosed on the relevant 
periodic statement just as any other transaction item must be 
disclosed.
    For the credit card industry as a whole, fee income has grown 
significantly in importance. With that trend, the types of fees 
creditors charge on open-end consumer credit accounts have grown in 
number and variety. As creditors charge new fees that are not 
specifically addressed by Regulation Z, creditors are sometimes unsure 
if the fee should be disclosed under TILA, and if so, whether it should 
be characterized as a finance charge or ``other charge.'' The rules for 
open-end accounts provide no tolerance for errors in disclosing the 
finance charge. In reviewing Regulation Z, the Board plans to consider 
whether there are ways to provide more clarity for creditors as to how 
particular fees should be classified.
    Regulation Z follows TILA in giving the terms ``finance charge'' 
and ``other charge'' broad and flexible meanings. This ensures that the 
rules are adaptable to changing conditions, but also creates some 
degree of uncertainty. Regulation Z and the staff commentary diminish 
the uncertainty somewhat by expressly identifying examples of charges 
that constitute finance charges and types that do not. 15 U.S.C. 1605; 
12 CFR 226.4(b) and (c). Nevertheless, rules that specifically address 
every fee generated in the marketplace are not practicable.
    In response to a December 2002 staff proposal to clarify the status 
of two new fees in the staff commentary, many industry commenters 
called for a different approach to cost disclosures that would provide 
more certainty about fees' proper classification. 67 FR 72618, December 
6, 2002; 68 FR 16185, April 3, 2003. Some industry commenters suggested 
that more certainty could be provided, for example, if fees were 
classified as finance charges based on whether payment of the fee is 
required as a condition to obtaining credit. They asserted that this 
standard would ease compliance and reduce litigation risks and promote 
comparison shopping by decreasing the risk that creditors might 
disclose the same fee differently.
    Q13. How could the Board provide greater clarity on characterizing 
fees as finance charges or ``other charges'' imposed as part of the 
credit plan? Under Regulation Z, finance charges include fees imposed 
as a condition of the credit as well as fees imposed ``incident to'' 
the credit. This includes ``service, transaction, activity, and 
carrying charges.'' 12 CFR 226.4(b)(2). What types of fees imposed in 
connection with open-end accounts should be excluded from the finance 
charge, and why? How would these fees be disclosed to provide 
uniformity in creditors' disclosures and facilitate compliance?
    Q14. How do consumers learn about the fees that will be imposed in 
connection with services related to an open-end account, and any 
changes in the applicable fees?
    Q15. What significance do consumers attach to the label ``finance 
charge,'' as opposed to ``fee'' or ``charge''?
    Q16. Some industry representatives have suggested a rule that would 
classify fees as finance charges only if payment of the fee is required 
to obtain credit. How would creditors determine if a particular fee was 
optional? Would costs for certain account features be excluded from the 
finance charge provided that the consumer was also offered a credit 
plan without that feature? Would such a rule result in useful 
disclosures for consumers? Would consumers be able to compare the cost 
of the different plans? Would such a rule be practicable for creditors?
    Q17. Some industry representatives have suggested a rule that would 
classify a fee as a finance charge based on whether the fee affects the 
amount of credit available or the material terms of the credit. How 
would such a standard operate in practice? For example, how would 
creditors distinguish finance charges from ``other charges''? What 
terms of a credit plan would be considered material?
    Q18. TILA requires the identification of other charges that are not 
finance charges and may be imposed as part of the plan. The staff 
commentary interprets the rule as applying to ``significant charges'' 
related to the plan. Has that interpretation been effective in 
furthering the purposes of the statute? Would another interpretation be 
more effective? Criteria that have been suggested as relevant to 
determining whether the Board should identify a charge as an ``other 
charge'' include: the amount of the charge; the frequency with which a 
consumer is likely to incur the charge; the proportion of consumers 
likely to incur the charge; and when and how creditors disclose the 
charge, if at all. Are those factors relevant? Are there other relevant 
factors?
    Q19. What other issues should the Board consider as it addresses 
these questions? For instance, in classifying fees for open-end plans 
generally, do home equity lines of credit present unique issues?
    Q20. How important is it that the rules used to classify fees for 
open-end accounts mirror the classification rules for closed-end loans? 
For example, the approach of excluding certain finance charges from the 
effective APR for open-end accounts is not consistent with the approach 
recommended by the Board for closed-end loans. In a 1998 report to the 
Congress concerning reform of closed-end mortgage disclosures, the 
Board endorsed an approach that would include ``all required fees'' in 
the finance charge and APR. (The report is at http://www.federalreserve.gov/boarddocs/press/boardacts/1998.)
    Over-the-credit-limit fees. Anecdotal evidence indicates that 
``penalty'' fees imposed on open-end credit accounts, such as over-the-
credit-limit fees and late-payment fees, have increased in recent 
years. Adequate disclosure of over-the-credit-limit fees may be of 
particular importance to consumers who have low-limit credit card 
accounts.
    Fees for paying late or exceeding a credit limit are disclosed with 
credit card applications and solicitations; in account-opening 
statements; and on periodic statements for billing cycles

[[Page 70931]]

when the fees are imposed. Although TILA does not specifically address 
the characterization of these fees, Regulation Z provides that the fees 
are not ``finance charges'' but must be disclosed as ``other charges.'' 
12 CFR 226.4(c)(2); comment 6(b)-1. In a recent case involving the 
disclosure of an over-the-credit-limit fee, the United States Supreme 
Court upheld the Board's regulation excluding such fees from the 
finance charge. See Household Credit Services v. Pfennig, 541 U.S. 232 
(2004).
    Concerns have been raised about some card issuers' practice of 
allowing consumers to remain over their credit limit for multiple 
billing cycles. For example, a creditor may establish an initial credit 
limit, but once that limit is exceeded the creditor might not require 
the consumer to bring the account balance below the originally 
established credit limit. As a result, the creditor may impose an over-
the-credit-limit fee on a continuing basis for each month the consumer 
carries a balance in excess of the original credit limit.
    Q21. The staff commentary to Regulation Z provides guidance on when 
a fee is properly excluded from the finance charge as a bona fide late 
payment charge, and when it is not. See Comment 4(c)(2)-1. Is there a 
need for similar guidance with respect to fees imposed for exceeding a 
credit limit, for example, where the creditor does not require the 
consumer to bring the account balance below the originally established 
credit limit, but imposes an over-the-credit-limit fee each month on a 
continuing basis?
    Q22. Because of technical limitations or other practical concerns, 
credit card transactions may be authorized in circumstances that do not 
allow the merchant or creditor to determine at the moment of the 
transaction whether the transaction will cause the consumer to exceed 
the previously established credit limit. How do card issuers explain to 
consumers their practice of approving transactions that might result in 
the consumer's exceeding the previously established credit limit for 
the account and being charged an over-the-credit-limit fee? When are 
over-the credit-limit fees imposed; at the time of an approved 
transaction, or later such as at the end of the billing cycle? The 
Board specifically requests comments on whether additional disclosures 
are needed regarding the circumstances in which over-the-credit-limit 
fees will be imposed.
How Do Consumers Use the ``Effective'' or ``Historical'' Annual 
Percentage Rate Disclosed on Periodic Statements?
    Under TILA the finance charge is also disclosed as an annualized 
rate, the APR. The APR is based on the periodic rate (interest) for 
purposes of credit card solicitations and applications, account-opening 
disclosures, and advertisements for open-end plans. But for periodic 
statements, creditors must also disclose an ``effective'' or 
``historical'' APR that includes any finance charges other than 
interest imposed during the billing cycle (such as cash advance fees). 
TILA requires non-interest finance charges to be amortized over one 
billing cycle for purposes of calculating the effective APR, and as a 
result, such fees can result in a high double-digit (or sometimes, 
triple-digit) effective APR on periodic statements. That is why under 
the regulation and staff commentary, non-recurring loan fees, points, 
or similar finance charges related to the opening, renewing, or 
continuing of an open-end account are currently excluded from the 
effective APR that is disclosed for a particular billing cycle.
    The utility of disclosing the effective APR, which is mandated by 
the statute, is controversial. The legislative history of TILA suggests 
that Congress adopted the effective APR for open-end credit to ensure 
that the cost of credit in the form of transaction charges or minimum 
or fixed finance charges was fully and uniformly disclosed. The history 
also indicates that Congress was aware that the effective APR would 
vary from the nominal APR, possibly substantially, when such charges 
were imposed. Moreover, in at least one hearing Congress heard 
testimony that an effective APR would not be useful to consumers, and 
might confuse them.
    Consumer advocates believe the effective APR is a key disclosure. 
They contend that a sharp rise in the APR caused by the imposition of a 
fee makes consumers more likely to notice the fee and, therefore, to 
understand that their action triggering the fee increased the overall 
cost of credit. Consumer advocates have also stated that the effective 
APR should be used by consumers in evaluating their credit options and 
how they might avoid such charges in the future. Consumer advocates 
sometimes refer to this theory as the ``shock value'' of the APR.
    Over the years, industry representatives have provided comments 
questioning the value to consumers of disclosing the effective APR on 
periodic statements. They believe the effective APR could be eliminated 
without diminishing consumer protections because in their view it 
confuses consumers who do not understand how it differs from the APR 
based on the periodic interest rate. Industry representatives also 
assert that the effective APR overstates the cost of cash advances 
because it is based on amortizing the fees over one billing cycle even 
though some consumers may carry the advance for a longer period.
    Q23. Have changes in the market and in consumers' use of open-end 
credit since the adoption of TILA affected the usefulness of the 
historical APR disclosure? If so, how? The Board seeks data relevant to 
determining the extent to which consumers understand and use the 
historical APR disclosed on periodic statements. Is there data on how 
disclosure of the historical APR affects consumer behavior? Is it 
useful to consumers to include in the historical APR transaction 
charges such as cash advance fees and fees to transfer balances from 
other accounts?
    Q24. Are there ways to improve consumers' understanding of the 
effective APR, such as by providing additional context for the 
disclosure? For example, should consumers be informed that the 
effective APR includes fees as well as interest, and that it assumes 
the fees relate to credit that was extended only for a single billing 
period?
    Q25. Are there alternative frameworks for disclosing the costs of 
credit on periodic statements that might be more effective than 
disclosing individual fees and the effective APR? For example, would 
consumers benefit from a disclosure of the total dollar amount of all 
account-related fees assessed during the billing cycle, or the total 
dollar amount of fees by type? Would a cumulative year-to-date total 
for certain fees be useful for consumers?
    Disclosures about rate changes. Under Regulation Z, some changes to 
the terms of an open-end plan require additional notice. (The statute 
does not address changes in terms to open-end plans.) The general rule 
is that 15 days' advance notice is required to increase the finance 
charge (including the interest rate) or an annual fee. 12 CFR 
226.9(c)(1). However, advance notice is not required in all cases. For 
example, if the interest rate or other finance charge increases due to 
a consumer's default or delinquency, notice is required, but need not 
be given in advance. 12 CFR 226.9(c)(1); comment 9(c)(1)-3. And no 
change-in-terms notice is required if the creditor specifies in advance 
the circumstances under which an increase to the finance charge or an 
annual fee will occur. Comment 9(c)-1. For example, some

[[Page 70932]]

credit card account agreements permit the card issuer to increase the 
interest rate if the consumer pays late, or if card issuer learns the 
consumer paid late on another credit account, even if the consumer has 
always paid the card issuer on time. Under Regulation Z, because the 
circumstances are specified in advance in the account agreement, the 
creditor need not provide a change-in-terms notice 15 days in advance 
of the increase; the new rate will appear on the periodic statement for 
the cycle in which the increase occurs.
    Consumer advocates have expressed concerns that consumers who have 
triggered certain penalty rates may not be aware of the possibility of 
the increase, and thus are unable to shop for alternative financing 
before the increased rate takes effect.
    Q26. Is mailing a notice 15 days before the effective date of a 
change in interest rates adequate to provide timely notice to 
consumers?
    Q27. How are account-holders alerted to increased interest rates 
due to consumers' default on this account or another credit account? 
Are existing disclosure rules for increases to interest rates and other 
finance charges adequate to enable consumers to make timely decisions 
about how to manage their accounts? If not, provide suggestions.
Do Consumers Need Additional Information About Other Factors That 
Affect the Cost of Credit?
    In addition to rates and fees, the cost of credit can also be 
affected by the creditor's method of calculating the outstanding credit 
balance; the size of the consumer's monthly payment; and the creditor's 
allocation of that payment among different charges and transactions. As 
explained below, the Board seeks comment on the need for regulatory 
revisions to enhance consumers' understanding of the effect of these 
factors on the cost of credit.
    Balance calculation methods. Under TILA and Regulation Z, consumers 
receive information on how account balances are calculated for open-end 
accounts although TILA does not govern which calculation methods 
creditors must use. Creditors may identify common balance calculation 
methods by name on credit card application disclosures. The method is 
described in more detail in account-opening disclosures and on periodic 
statements. See 15 U.S.C. 1637(a)(2), (b)(7), (c)(1)(A)(iv); 12 CFR 
226.5a(b)(6), 226.6(a)(3), 226.7(e). The Board has published model 
clauses for some common balance calculation methods. 12 CFR 226, 
Appendix G-1.
    The balance calculation method used by a creditor can affect the 
cost of credit. For example, for purposes of assessing finance charges 
on unpaid balances, some creditors include balances from the previous 
cycle, although some do not. Others may include purchases made during 
the current cycle, although not all do.
    Q28. How significantly does the balance calculation method affect 
the cost of credit given typical account use patterns?
    Q29. Do consumers understand that different balance calculation 
methods affect the cost of credit, and do they understand which balance 
calculation methods are more or less favorable for consumers? Would 
additional disclosures at account-opening assist consumers and, if so, 
what type of disclosures would be useful?
    Q30. Explanations of balance calculation methods are complex and 
may include contractual terms such as rounding rules. Precise 
explanations are required on account-opening disclosures and on 
periodic statements. Should the Board permit more abbreviated 
descriptions on periodic statements, along with a reference to where 
consumers can obtain further information about the calculation method, 
such as the credit agreement or a toll-free telephone number?
    Disclosing the effects of making only minimum payments. Subject to 
any required minimum payment, consumers are free to decide each billing 
period how much to pay on outstanding balances. The consumer's payment 
amount each period affects the overall cost of credit, and can result 
in negative amortization if the payments are insufficient to cover the 
accrued interest charges. Furthermore, if a consumer's account balance 
exceeds the established credit limit and the consumer's payment is not 
large enough to bring the balance below the limit, an over-the-credit-
limit fee might be assessed even if the payment satisfied the minimum 
amount specified by the creditor.
    TILA and Regulation Z do not require disclosures associated with 
payment amounts, except to require an advance notice when a change in 
the method of calculating the minimum payment will increase it. 12 CFR 
226.9(c)(1). Minimum-payment amounts are set by agreement and disclosed 
in the periodic statement at the creditor's option or because of other 
applicable law. The banking agencies, through the Federal Financial 
Institutions Examination Council, have provided guidance to card 
issuers on safety-and-soundness issues relating to minimum payments, 
but the guidance does not mandate particular consumer disclosures. See 
the Board's Division of Banking Supervision and Regulation SR 03-1, 
Account Management and Loss Allowance Methodology for Credit Card 
Lending, January 8, 2003.
    In recent years, consumer advocates have raised concerns about 
whether consumers understand the effects of making only minimum 
payments on their open-end accounts. Provisions in certain proposed 
bankruptcy reform bills before Congress would require creditors to 
provide standardized examples of the time it would take to pay off an 
assumed balance if the consumer makes only the minimum payment. See, 
for example, Sec. 1301 of H.R. 975, 108th Congress. The bills would 
allow consumers to obtain an estimate of how long it would take to pay 
their actual account balance by calling a toll-free telephone number 
established by the creditor. Industry representatives note that 
disclosures based on the status of individual accounts are burdensome; 
they also say that the disclosure would not be helpful to consumers 
because it would be based on an unrealistic assumption that the 
consumer has stopped using the account for new extensions of credit.
    Consumer advocates have also expressed concerns about open-end 
accounts that are specifically established to finance a single purchase 
that is equal to or nearly equal to the credit limit, because consumers 
do not receive disclosures about the total payment amount and the time 
it will take to repay the debt based on the minimum payment. But 
industry representatives have noted that requiring separate disclosures 
at account opening in such cases would unfairly disadvantage merchants' 
credit plans because issuers of general purpose credit cards would not 
provide such disclosures at the point of sale for an identical 
transaction.
    Q31. Is it appropriate for the Board to consider whether Regulation 
Z should be amended to require: (1) Periodic statement disclosures 
about the effects of making only the minimum payment (such as, 
disclosing the amortization period for their actual account balance 
assuming that the consumer makes only the minimum payment, or 
disclosing when making the minimum payment will result in a penalty fee 
for exceeding the credit limit); (2) account-opening disclosures 
showing the total of payments when the credit plan is specifically 
established to finance purchases that are equal or nearly equal to the 
credit limit (assuming only minimum payments are made)? Would such 
disclosures benefit consumers?

[[Page 70933]]

    Q32. Is information about the amortization period for an account 
readily available to creditors based on current accounting systems, or 
would new systems need to be developed? What would be the costs of 
implementing such a rule?
    Q33. Is there data on the percentage of consumers, credit 
cardholders in particular, that regularly or continually make only the 
minimum payments on open-end credit plans?
    Payment allocation. Some accounts that have multiple features apply 
different periodic rates to particular features such as purchases, cash 
advances, and balance transfers. How a consumer's payment is allocated 
to the balance for each feature affects the consumer's cost of credit. 
For example, assume a consumer has a $100 outstanding balance for 
purchases carrying a 0% promotional APR, and a $150 outstanding balance 
from cash advances carrying an 18% APR. If the consumer makes a $100 
payment, and the payment is allocated first to the balance carrying the 
lowest rate (the purchase balance), the consumer will pay finance 
charges on $150, the entire cash advance balance. Had the creditor 
allocated the consumer's payment to the cash advance, the consumer 
would incur finance charges only on the remaining cash advance balance 
of $50.
    A creditor's method for allocating payment may be included in the 
credit contract, but neither TILA nor Regulation Z requires a creditor 
to use a particular payment allocation method or to disclose the method 
it uses. Indeed, the staff commentary expressly indicates that 
disclosure of the allocation of payments is not required. Comment 
6(a)(3)-2.
    Q34. What are the common methods of payment allocation and how much 
do they affect the cost of credit for the typical consumer?
    Q35. Do creditors typically disclose their allocation methods, and 
if so, how?
    Q36. Is it appropriate for the Board to consider whether Regulation 
Z should be amended to require disclosure of the payment allocation 
method on the periodic statement? Would such a disclosure materially 
benefit consumers? Some creditors offer a low promotional rate, such as 
a 0% APR for cash advances for a limited time and a higher APR for 
purchases. Creditors typically do not allocate any payments to 
purchases until the entire cash advance is paid off. Are additional 
disclosures needed to avoid consumer confusion or misunderstanding? 
What would the cost be to creditors of providing such a disclosure? 
What level of detail would provide useful information while avoiding 
information overload?
Tolerances
    TILA authorizes the Board to permit tolerances for numerical 
disclosures other than the APR. 15 U.S.C. 1631(d). Such tolerances are 
required to be narrow enough to prevent the tolerance from resulting in 
misleading disclosures or disclosures that circumvent the purposes of 
TILA.
    Q37. What tolerances should the Board consider adopting pursuant to 
this provision? Should the Board expressly permit an overstatement of 
the finance charge on open-end credit? Would that adequately address 
concerns over proper disclosure of fees? How narrow should any 
tolerance be to ensure TILA's goal of uniformity is preserved?
Other Questions Regarding the Content of Disclosures
    Q38. In considering changes to the disclosures required by 
Regulation Z, the Board seeks data relevant to the costs and benefits 
of the proposed revisions. Accordingly, commenters proposing revisions 
to the disclosure requirements are requested to provide data estimating 
the cost difference in complying with the existing rules compared to 
any proposed alternatives, including any one-time costs to implement 
the changes.
    Q39. Are there particular types of open-end credit accounts, such 
as subprime or secured credit card accounts, that warrant special 
disclosure rules to ensure that consumers have adequate information 
about these products?
    Q40. Are there additional issues the Board should consider in 
reviewing the content of open-end disclosures? For example, in 2000, 
the Board revised the requirements for disclosures that accompany 
credit card applications and solicitations. 65 FR 58903, October 3, 
2000. Is the information currently provided with credit card 
applications and solicitations adequate and effective to assist 
consumers in deciding whether or not to apply for an account?
    Q41. Are there classes of transactions for which the Board should 
exercise its exemption authority under 15 U.S.C. 1604(a) to effectuate 
TILA's purpose, facilitate compliance or prevent circumvention or 
evasion, or under 15 U.S.C. 1604(f) of TILA because coverage does not 
provide a meaningful benefit to consumers in the form of useful 
information or protection? If so, please address the factors that the 
Board is required to consider under the statute.
    Q42. Should the Board exercise its authority under 15 U.S.C. 
1604(g) to provide a waiver for certain borrowers whose income and 
assets exceed the specified amounts?

C. Is There a Need To Modify the Rules That Implement TILA's 
Substantive Protections for Open-End Accounts?

    TILA and Regulation Z provide protections to consumers who obtain 
open-end credit. Some protections apply only to transactions involving 
credit cards; others apply to all extensions of credit under an open-
end plan. Protections involving billing disputes generally allow 
consumers to avoid paying the disputed amount while the card issuer 
investigates the matter, and prohibit card issuers from assessing 
finance charges on the disputed amount or reporting the amount as 
delinquent until the investigation is completed. To summarize the 
rules:
     Consumers using an open-end credit plan may assert a 
billing error, which triggers creditors' duty to investigate the 
allegation within prescribed time limits. A ``billing error'' includes 
a periodic statement that reflects an extension of credit for property 
or services: (1) Not authorized by the consumer; or (2) not accepted by 
the consumer, or not delivered to the consumer as agreed (for example, 
when clothing is sent in the wrong size or color). A billing error also 
includes creditors' failure to credit payments or to deliver statements 
to a consumer's address of record. 15 U.S.C. 1666; 12 CFR 226.13.
     A cardholder may assert against the card issuer a claim or 
defense for defective goods or services purchased with a credit card, 
as to unpaid balances for the goods or services, if the merchant 
honoring the card fails to resolve the dispute. This right is limited 
to disputes exceeding $50 for purchases made in the consumer's home 
state or within 100 miles. 15 U.S.C. 1666i; 12 CFR 226.12(c).
     Cardholders' liability for the unauthorized use of a 
credit card is capped at $50. But cardholders have no liability for 
charges made after notification is given to the card issuer, or charges 
made when the card itself (or other sufficient means of identifying the 
cardholder) is not presented. 15 U.S.C. 1643; 12 CFR 226.12(b).
     Credit cards may be issued to consumers only upon request. 
One or more credit cards may be issued to cardholders in renewal of, or 
substitution for, an accepted card, with some conditions. 15 U.S.C. 
1642; 12 CFR 226.12(a).

[[Page 70934]]

     Payments received from a consumer on an open-end credit 
plan must be posted promptly to the consumer's account. Under 
Regulation Z, payments generally must be credited to a consumer's 
account as of the date of receipt, except when a delay in crediting 
does not result in a finance charge or ``other charge'' being imposed. 
Creditors may specify requirements for the consumer to follow in making 
payments. 15 U.S.C. 1666c; 12 CFR 226.10.
    Q43. The Board solicits comments on whether there is a need to 
revise the provisions implementing TILA's substantive protections for 
open-end credit accounts. For example, are the existing rules adequate, 
and if not, why not? Are creditors' responsibilities under the rules 
clear? Do the existing rules need to be updated to address particular 
types of accounts or practices, or to address technological changes?
    Accessing credit card accounts. TILA defines a credit card as ``any 
card, plate, coupon book or other credit device existing for the 
purpose of obtaining money, property, labor, or services on credit.'' 
15 U.S.C. 1602(k). In addition, Regulation Z provides that a credit 
card must be a device ``that may be used from time to time to obtain 
credit.''12 CFR 226.2(a)(15).
    It is increasingly common for consumers to access their credit card 
plans without presenting the card, for example, in making purchases 
over the Internet and by telephone. Credit card transactions conducted 
by telephone or Internet receive all of TILA's protections, even though 
the physical device is not presented to the merchant when the account 
number is transmitted.
    Q44. Information is requested on whether industry has developed, or 
is developing, open-end credit plans that allow consumers to conduct 
transactions using only account numbers and do not involve the issuance 
of physical devices traditionally considered to be credit cards. If 
such plans exist, what policies do such creditors have for resolving 
accountholder claims when disputes arise?
    ``Convenience checks.'' Credit card issuers also provide account-
holders with ``convenience checks'' that can be used to obtain cash, 
purchase goods or services, or pay the outstanding balance on another 
account. Convenience checks are mailed to consumers unsolicited, 
sometimes with consumers' monthly statements. The amount of each check 
issued by the consumer will be billed to the consumers' credit card 
account. Convenience checks allow consumers to use their credit card 
account to finance the purchase of goods or services at merchants that 
do not accept credit cards. Anecdotal evidence also suggests 
convenience checks are used for large-dollar transactions, such as 
college tuition payments.
    Currently, a convenience check is not treated as a credit card 
under Regulation Z because it can be used only once and not ``from time 
to time.'' Although the rules for resolving billing errors apply to all 
transactions conducted under an open-end plan, including those 
involving convenience checks, TILA's protections regarding merchant 
disputes, unauthorized use of the account, and the prohibition against 
unsolicited issuance apply only to credit cards and do not cover 
transactions using convenience checks.\6\
---------------------------------------------------------------------------

    \6\ For convenience checks, the Uniform Commercial Code (UCC) 
provisions governing checks apply; under the UCC a consumer 
generally has no liability for a forged check. UCC 4-401, 3-401.
---------------------------------------------------------------------------

    In discussing the issue at the October 2003 meeting of the Board's 
Consumer Advisory Council, some members stated that Regulation Z's 
protections for credit cards should be revised to apply to all credit 
extended under a credit card account, whether the card itself or 
another device, such as a convenience check, is used. They noted that 
the Board could cover convenience checks by revising the regulation's 
definition of a ``credit card'' for this purpose, to eliminate the 
requirement that the device be usable ``from time to time.'' But others 
stated that convenience checks should not be covered by TILA's 
protections and should be treated the same way as a check drawn on a 
deposit account.
    Q45. Have consumers experienced problems with convenience checks 
relating to unauthorized use or merchant disputes, for example? Should 
the Board consider extending any of TILA's protections for credit card 
transactions to other extensions on credit card accounts and, in 
particular, convenience checks?
    Unsolicited issuance of credit cards. Limitations on issuing 
unsolicited credit cards were added to TILA in 1970 to address concerns 
about theft, inconvenience to consumers, and consumers' management of 
their personal finances. TILA generally prohibits creditors from 
issuing credit cards except in response to a request or application but 
exempts cards issued as renewals or substitutions to replace an 
accepted card. 15 U.S.C. 1642.
    In 2003, Board staff revised the commentary to the relevant 
provision of Regulation Z, Sec.  226.12(a), to allow card issuers to 
replace an accepted card with more than one card, subject to certain 
conditions. 68 FR 16185, April 3, 2003. Based on the revisions, card 
issuers can, for example, issue credit cards using a new format or 
technology to existing accountholders, even though the new card is 
intended to supplement rather than replace the traditional card. Based 
on the public comments, staff stated it planned to recommend that the 
Board consider amending Sec.  226.12(a) to allow the unsolicited 
issuance of additional cards on an existing account even when the 
accountholder's existing card is not being replaced, under certain 
conditions.
    Q46. Should the Board consider revising Regulation Z to allow 
creditors to issue additional credit cards on an existing account at 
any time, even when there is no renewal or substitution of a previously 
issued card? If so, what conditions or limitations should apply? For 
example, should the Board require that the additional cards be sent 
unactivated? If activation is required, should the Board allow issuers 
to use alternative security measures in lieu of activation, such as 
providing advance written notice to consumers that additional cards 
will be sent?
Prompt Crediting of Payments
    Payments received from a consumer on an open-end credit plan must 
be credited to the account as of the date the payment is received by 
the creditor. Creditors cannot impose a finance charge or ``other 
charge'' if the creditor has received payment in a readily identifiable 
form in the amount, manner, location, and time indicated by the 
creditor to avoid the imposition of the charge. 12 CFR 226.10(a). 
Creditors may specify requirements for making payments such as setting 
a cut-off hour for payment to be received, but the requirements must be 
reasonable and it should not be difficult for most consumers to make 
conforming payments. Comments 10(b)-1, -2.
    Consumer advocates have raised concerns about the reasonableness of 
card issuers' cut-off hours. They note that some creditors' service 
centers are open 24 hours 7 days a week to receive mail delivery and 
electronic payments continuously. In addition, questions have arisen 
concerning creditors' use of third-party payments processors, and 
whether the receipt of payments by the third-party is deemed to be 
receipt by the creditor.
    Q47. What are the cut-off hours used by most issuers for receiving 
payments? How do issuers determine the cut-off hours?

[[Page 70935]]

    Q48. Do card issuers' payment instructions and cut-off hours differ 
according to whether the consumer makes the payment by check or 
electronic fund transfer, or by using the telephone or Internet? What 
is the proportion of consumers who make payments by mail as opposed to 
using expedited methods, such as electronic payments?
    Q49. Do the existing rules and creditors' current disclosure 
practices clearly inform cardholders of the date and time by which card 
issuers must receive payment to avoid additional fees? If not, how 
might disclosure requirements be improved?
    Q50. Do the operating hours of third-party processors differ from 
those of creditors, and if so, how? Do creditors treat payments 
received by a third-party processor as if the payment was received by 
the creditor? What guidance, if any, is needed concerning creditors' 
obligation in posting and crediting payments when third-party 
processors are used?
    Q51. Should the Board issue a rule requiring creditors to credit 
payments as of the date they are received, regardless of the time?

VI. Request for Comment on Additional Issues

    In addition to responding to the Board's request for comments on 
the open-end credit issues identified above, the Board invites the 
public to discuss other ways that Regulation Z might be improved and to 
provide specific suggestions for implementing those changes, including:
    Q52. Providing guidance not expressly addressed in existing rules. 
Board staff is asked to provide informal oral advice on an ongoing 
basis about how Truth in Lending rules may apply to new products and 
circumstances not expressly addressed in Regulation Z and its official 
staff commentary. The Board invites the public to identify issues where 
they believe staff's informal advice should be formalized or addressed 
anew. Should such changes be adopted after notice and public comment, 
they would apply prospectively and compliance would become mandatory 
after an appropriate implementation period.
    Q53. Adjusting exceptions based on de minimis amounts. To 
facilitate compliance, the Board has provided a number of exceptions 
based on de minimis dollar amounts. For example, TILA's open-end rules 
require creditors to transmit periodic statements at the end of billing 
cycles in which there is an outstanding balance or a finance charge is 
imposed; the regulation relieves creditors of that duty if the 
outstanding debit or credit balance is $1 or less (and no finance 
charge is imposed). 15 U.S.C. 1637(b); 12 CFR 226.5(b)(2)(i). 
Similarly, the Board provides for a simplified way to calculate the 
effective APR on periodic statements when a minimum finance charge is 
assessed and is 50 cents or less. 12 CFR 226.14(c)(4). Should de 
minimis amounts such as these be adjusted, and if so, to what extent?
    Q54. Improving plain language and organization; identifying 
technical revisions. The Board is required to use ``plain language'' in 
all proposed and final rules published after January 1, 2000. 12 U.S.C. 
4809. The Board invites comments on whether the existing rules are 
clearly stated and effectively organized, and how, in the upcoming 
review of Regulation Z, the Board might consider making the text of 
Regulation Z and its official staff commentary easier to understand. 
Are there technical revisions to the regulation or commentary that 
should be addressed?
    Q55. Deleting obsolete rules or guidance. A goal of the Regulation 
Z review is to delete provisions that have become obsolete due to 
technological or other developments. Are there any such provisions?
    Q56. Recommendations for legislative changes. Are there any 
legislative changes to TILA the Board should consider recommending to 
the Congress? For example, where a rule is based on a dollar amount 
established by the statute, the Board seeks comment on whether to 
recommend adjustments of those dollar amounts to the Congress, and if 
so, the amount of such adjustments.
    Q57. Recommendations for nonregulatory approaches. In addition to 
requesting comment on suggestions for regulatory or statutory changes, 
the Board seeks comment on nonregulatory approaches that may further 
the Board's goal of improving the effectiveness of TILA's disclosures 
and substantive protections. Such approaches could include guidance in 
the form of best practices or consumer education efforts. For example, 
calculation tools are widely available on the Internet. How might the 
availability of those tools be used to address concerns that consumers 
need better information about the effects of making only minimum 
payments on their account? Are there any data that indicate the extent 
to which consumers access calculation tools that are publicly 
available?
    Q58. Reviewing other aspects of Regulation Z. Although the Board is 
proposing to focus the review primarily on the rules for open-end 
credit, are there other areas or particular sections of Regulation Z 
that should be included in this initial stage of the review? For 
example:
    (a) Definitions and rules of construction. Are changes needed to 
the definitions or rules of construction in Sec.  226.2 of the 
regulation? Unless defined in the regulation, terms have the meaning 
given to them by state law or contract. Are there specific terms that 
are not defined in Regulation Z that should be? For example, the 
Board's staff has received questions about Sec.  226.20, which 
generally requires creditors to provide new TILA disclosures when a 
closed-end loan is refinanced. Under the regulation and staff 
commentary, a ``refinancing'' is generally deemed to occur when an 
existing obligation has been satisfied and replaced by a new 
obligation, ``based on the parties'' contract and applicable law.'' See 
Comment 20(a)-1. Concerns have been raised about the current approach, 
and whether it results in uniform application of Regulation Z because 
different states are free to draw different conclusions about when a 
particular set of circumstances constitutes a ``satisfaction and 
replacement.'' Courts may take a case-by-case approach to ascertain the 
parties' intent before deciding whether a new promissory note satisfied 
and replaced the original note, or whether the new note merely 
``relates back'' to the original note that is not deemed to be 
extinguished. The issue raised is whether the Board should consider 
adopting a definition of ``refinancing'' that does not rely on state 
law and seeks to create a more uniform approach in determining when new 
disclosures are required.
    (b) Exempt transactions. Section 226.3 of Regulation Z implements 
the provisions of 15 U.S.C. 1603, which specifies classes of 
transactions not covered by TILA. Do rules implementing 15 U.S.C. 1603 
need to be updated?

VII. Plans for Reviewing Other Areas

    Although the focus of this ANPR is TILA and Regulation Z's rules 
for open-end credit not secured by a home, the Board has the following 
plans for reviewing other areas of Regulation Z:
     Predatory mortgage lending. Issues related to predatory 
mortgage lending will be examined in public hearings held pursuant to 
the Home Ownership and Equity Protection Act (HOEPA), which amended 
TILA in 1994. HOEPA uses rate and fee triggers to identify a class of 
high-cost closed-end mortgage loans, and it provides consumers

[[Page 70936]]

entering into these transactions with additional disclosures and 
special protections. HOEPA requires that the Board periodically hold 
public hearings on home-equity lending and the adequacy of protections 
under HOEPA. After holding hearings in 2000, the Board amended the 
rules implementing HOEPA, which became effective on October 1, 2002. 
Board staff plans to ask the Board to consider holding further hearings 
under HOEPA during 2006.
     Closed-end mortgage credit. From 1996 to 1998, the Board 
and HUD studied possible regulatory changes to TILA and the Real Estate 
Settlement Procedures Act (RESPA) to improve mortgage-related 
disclosures. The Board concluded that meaningful changes to the 
disclosures required legislative action. The Board and HUD submitted a 
joint report to the Congress outlining a framework that could be used 
as a starting point for considering legislative changes. Although 
legislation has not been enacted, in 2002 HUD commenced a rulemaking 
that sought to adopt many of the changes recommended in the Board-HUD 
joint report. HUD's proposal was not finalized, and HUD has announced 
that it will issue a revised proposal for public comment in the near 
future. The Board believes that significant changes to mortgage 
disclosures under TILA would best be considered in connection with 
HUD's future rulemaking.
     Home-equity lines of credit and adjustable-rate mortgage 
loans. Staff plans to initiate a separate review, in 2005, of 
Regulation Z's rules requiring brochures and generic disclosures when 
consumers obtain applications for closed-end adjustable-rate mortgages 
(ARMs) and open-end home-equity lines of credit (HELOCs). The issues to 
be considered deal mainly with variable-rate mortgage lending, which 
are distinct from issues affecting general open-end credit rules. The 
ARM rules would be reviewed in consultation with the other federal 
agencies. Because the HELOC and ARM rules are similar, these rules are 
best reviewed simultaneously to maximize consistency.

    By order of the Board of Governors of the Federal Reserve 
System.

    Dated: December 3, 2004.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 04-26935 Filed 12-7-04; 8:45 am]
BILLING CODE 6210-01-P